12 Days of Freshers

What Does The Increase In The Student Loan Interest Rate Mean for Students?

Aidan Hall

Back in August, the Department of Education announced that, starting from the 1st September, the interest rate applied to student loans will rise to 5.6%, up from the 5.4% of last year. As new and returning students head to university, Impact asks: why has this happened, and what does this mean for students like us?

Why the increase?

Each year, student loan interest rates are calculated using the previous retail price index, or RPI (a measure of inflation), plus an extra 3% on top. Last year, RPI was calculated at 2.4%, however in March 2020 RPI had increased up to 2.6%, leading to the increase in the applied student loan interest rate. Effectively, the rate inflation has slightly increased, meaning the interest rate has also been increased on student loans.

Who does this affect?

Since the 1st September, the new rate has been applied to all students with a Plan 2 loan. You’re on a Plan 2 loan if you are a new student in England and Wales, or an undergraduate/graduate who has taken out a loan since 2012. Students based in Scotland and Northern Ireland, plus those who took loans in England and Wales before 2012 will not, however, see any change to there student loan interest rate over the next 12 months.

So, what does this mean for students?

“When so many are struggling with their finances due to the coronavirus, it’s not actually as bad as it seems”

A slightly higher interest rate will, indeed, mean that your accumulated loan balance will be higher than it would have been. This being said, the increase is marginal and will not make huge difference. For example, a third-year student who owes £30,000 will have £1,680 added to their debt this year instead of £1,620.

In sum, students will not be worse off because of these higher rates. You do not start loan repayments until you’ve left your course and are earning above a certain income threshold. In this way, the amount to pay off is dictated by how much you earn – and this has not changed.

“While an interest rate rise may seem unfair and unwarranted,” Helen Saxon, the banking editor at MoneySavingExpert.com, explains, “when so many are struggling with their finances due to the coronavirus, it’s not actually as bad as it seems. Most people will never fully repay their student loan before it gets wiped after around 30 years.”

Aidan Hall

Featured image courtesy of GotCredit on Flickr. Image license found here. No changes were made to this image.

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